On LVT and MMT

Submitted by wes.whitman on 2018, August 31 - 23:03

(my response to something posted on a forum):

So, the author of the article said: “As soon as land rent is taxed, the purchase price of land will drop. Since land rents are such a great source of public revenue, we will want as much of it as possible…. Since building and land are sold in the same transaction, determination of the purchase price of the land is done by subtracting the assessed value of the building from the total purchase price. This works well enough in a system without LVT, but when we finally have our cherished LVT in place, we have a problem! Under an idealized LVT the purchase price of land is zero, the sales price of real estate equals the value of the building, and the residual value is zero.”

Firstly, I don't think that LVT would reduce the land price to zero in the real world. Let me give an example of an analogous situation. Individualist anarchists argued that pure competition would lead to profits falling to zero. Each competitor would try to undercut the competition until the price was reduced to the cost of production and the profits were zero. This holds true only in a hypothetical ideal world. I don't think it would ever occur in the real world. Similarly, I don't think the cost of land will ever fall to zero in the real world, even with the most competitive laissez-faire system. Similarly, I think LVT reducing land price to zero cannot hold true in the real world. Some land will always be worth more than other land and land values will always fluctuate, so anything analogous to the pure LVT ideal is simply unattainable in real world scenarios.

However, let’s suppose that LVT in a single-tax system does reduce the amount of revenue significantly. How much of a problem is that? Well, not as much as most people think.

So, let's turn to Modern Monetary Theory (MMT) here. What is money? What is the function of taxation? And what is the origin of these institutions?

Money originated as a form of credits, typically issued by the government, which one was required to use in order to pay fines and taxes. It originated not on the market, but in the penal system. “If you do injure someone, you must pay them such-and-such as recompense.” Originally, money was not used for trade and exchange. It was used for settling debts that resulted from fines. Fines as punishment for crimes and infractions existed before taxation did. And, credit or IOU systems of money preceded commodity money. Tally sticks and other such credit systems were in use long before precious metals were used as money. The use of precious metals as money didn't begin until kings started sending armies to conquer other societies. The invading army would loot and steal all the gold and silver, then the king would have it melted down and minted into coin, with which he’d pay the soldiers. Then, in order to establish a demand for the new coin money, they'd impose taxes and fines that are only payable in those government-issued coins. This would create a demand for the coins, so that people would be willing to exchange goods and services for said coins. This is where markets originated. Governments created commodity money and markets as we know them.

(David Graeber’s “Debt: The First 5,000 Years” goes into detail on the anthropological and archeological evidence that supports this narrative. Also, check out Michael Hudson’s lectures on MMT, which can be found on YouTube.)

One thing to notice is that the government first has to spend the money into existence (by paying the soldiers) before it can collect taxes. Government spending is the issuance of money, not the spending of a stock of currency. When taxes are collected, the money essentially ceases to exist. Kings would often collect taxes and melt the coins down and issue new coins. In colonial Virginia, the colony issued its own money and imposed a tax, then literally burnt all the revenue it collected—they set the paper money on fire. By time taxes are collected, the money was already spent. Spending precedes collection of taxes. Money must first be spent into existence before it can be collected in taxes.

Think of it like subway tokens (a metaphor I'm borrowing from Warren Mosler). First, the subway must issue the tokens before they can collect them. Issuing more tokens won’t devalue the coins unless they issue more than are needed. If there aren't enough tokens for all the people that can and want to ride the subway train, then they can issue more tokens without it causing inflation. If they issue a million additional tokens while the subway isn't being used at full capacity and no additional people are wanting to ride the subway, then they would devalue their tokens. A sovereign currency issuer is analogous to this.

So, let’s go back to our questions. What is money? An IOU or credit, issued by the government, which they promise to accept as a token in payment of fines, fees, and taxes. How does government issue money? By spending it into existence. Government spending is the issuance of money. What is the function of taxation? It's twofold: (1) it makes use of the currency mandatory, thereby establishing demand for money and fostering markets, and (2) it is a mechanism for controlling the money supply by removing money from circulation. Government spending and taxation are both monetary policy. Spending creates money. Taxation destroys it.

Looking at the United States today, this is clearly how the system works. When the federal government makes a payment, it does not send money from a bank account to the payee. There is no stock of money sitting anywhere. The money is literally spend into existence. There is a LOA and an authorization to spend from the Treasury, but there's no account with money in it. At no point does money collected in taxes ever get transferred anywhere or get spent (except in the case of local and municipal government, which doesn't have the authorization to spend money into existence). That money is simply removed from the money supply for all eternity when it is collected in taxes. The Treasury, which is in charge of government spending, is tasked with issuing the currency. The Treasury prints money and the Federal Reserve is the bank of the U. S. Treasury.

(Cf. “Modern Money Theory” by L. Randall Wray)

So, following MMT, I think that less tax revenue doesn't necessarily mean that government will lose its ability to spend, nor does it mean that spending must be inflationary. Personally, I’m not a single-taxer. I think that the author’s critique does imply that perhaps single-tax approaches need to be abandoned. We may need things like taxes on automated industry, taxes on excessive accumulation/savings, etc.

Commenting on this Blog entry will be automatically closed on October 31, 2018.